Iowa Ag Review
Fall 1999, Vol. 5 No. 4
Whither Farm Policy?
Bruce A. Babcock
babcock@iastate.edu
515-294-6785
s the U.S. Congress prepares
to pump at least $8.7 billion
in supplemental aid to
farmers (on top of the $10.5 billion
that has already been earmarked),
many people—both in and out of
agriculture—are openly wondering
if there isn’t a better way to run
farm programs. To many, it seems
that we have no coherent farm
policy in the sense that tax dollars
are being committed with no clear
objective in mind. After two straight
years of supplemental appropriations, it is clear that the current
farm program (the FAIR Act of 1996,
commonly known as Freedom to
Farm) is not a politically sustainable
policy. And, the policy objective of
the ad-hoc aid is clouded by the
apparent inability of Congress to
pass aid packages targeting assistance to the most at-risk farmers.
In fact, because federal price
support payments depend on
harvested production, the largest
amount of aid will go to crop producers who harvest the biggest
yields. Thus, Iowa corn farmers who
expect bumper crops this fall will
receive higher federal payments
than will drought-stricken corn
farmers in the eastern United States.
(It should be noted that the farmers
affected by the drought will receive
crop insurance indemnities—if they
had the foresight to purchase crop
insurance—in addition to some
emergency drought aid.) Furthermore, the group suffering more
financial stress than any other—hog
producers—will be receiving little
federal assistance.
Many critics are calling for an
end to Freedom to Farm. Some see
A
solutions in further reform of the
crop insurance program, while
others are calling for adoption of a
new policy made up of remnants of
the former farm bills. But, before
any new reform proposal can be
seriously evaluated, we need to
ask—and answer—“What do we
want farm policy to accomplish?”
FARM PROGRAM PROPOSALS:
A CROWDED MENU
It is naive to think that achieving
agreement on farm policy objectives
will be an easy task, especially when
we consider the crowded menu of
interest-group proposals.
·Environmental groups want
farm payments to be used to
entice farmers to adopt environmentally-friendly production practices.
·Many rural advocacy groups
want farm program payments
targeted to small producers,
believing that many small
farmers increase rural vitality
more than fewer large ones.
·Input suppliers prefer payment
schemes that do not require a
reduction in planted acreage.
·Non-farming landlords prefer
payment schemes that are
predictable so that land values
and cash rents will be enhanced.
·Farm operators who rent land
should prefer payments that
are not automatically bid into
land rental rates.
·Livestock producers—a group
that has never been eligible for
federal aid—simply hope that
federal policy does not increase
the price they must pay for
their feed.
·Processors and exporters prefer
a policy that encourages
expanded production.
·True believers in the free market
point out that the producer
price floors in the FAIR Act (the
loan rates) limit agriculture’s
flexibility. Land that should go
out of production in response to
low market prices stays in
production because the government-guaranteed price is higher
than the market price.
·Some point to the government’s
responsibility to maintain
national food security and an
affordable food supply as
reasons to subsidize crop
production.
·And Congress, it seems, just
wants to be viewed as doing
something for agriculture.
The wide reach and diversity of
these collective policy preferences
(the list is not exhaustive) indicate
that we need to step back, gain a
more unified perspective, and then
discuss what the role of government
in agriculture should be, and why.
CORRECTING MARKET FAILURES
The first, and perhaps most frequently cited, reason for government
intervention is to correct market
failures. Economists deem a market
to have failed when the price consumers pay for a product is significantly different from the cost of
production. Agriculture faces two
potential market failures: (1) agricultural pollution, and (2) the exercise
of market power in input supply and
output processing.
Free-market prices generally do
not account for the cost of pollution
because pollution damages are not
borne by producers of goods and
services. Thus, agricultural prices
will understate the full cost of production when agricultural production
leads to substantial pollution. Steps
Iowa Ag Review
ISSN 1080-2193
http://www.card.iastate.edu
IN THIS ISSUE
Whither Farm Policy ..................... 1
Iowa’s Agricultural Situation ........ 4
Sell or Store? CARD’s
Web-based decision aid
is now available ............................. 6
Can Subsidies Hurt
Iowa Agriculture? ......................... 7
European Union Agricultural
Reforms: Impacts for Iowa ........... 8
Meet the Staff ............................... 10
CARD Publications ...................... 11
Iowa Ag Review is published by the Center
for Agricultural and Rural Development
(CARD). This publication presents summarized results that emphasize the Iowa
implications of ongoing agricultural policy
analysis, analysis of the near-term agricultural
situation, and discussion of agricultural
policies currently under consideration.
Editor
Bruce A. Babcock
CARD Director
Editorial Staff
Katie Thomas
Managing Editor
Becky Olson
Desktop Production
Editorial Committee
John Beghin
Trade and Agricultural
Policy Division Head
Keith Heffernan
CARD Assistant Director
Phillip Kaus
U.S. Analyst, FAPRI
Contact Betty Hempe for a free subscription,
publication information, and address changes at: Iowa
Ag Review, CARD Publications, Iowa State University,
578 Heady Hall, Ames, IA 50011-1070; Phone 515-2947519; Fax 515-294-6336; E-mail CARD@card.iastate.edu;
Web site www.card.iastate.edu
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2
can be taken to make sure that the
cost of cleaning up pollution is fully
reflected in the price of the good.
Such intervention can actually
increase the benefits of a free
market economy by ensuring that
all costs of production are reflected
in market prices.
The use of market power by
large firms to enhance their profits
can result in a divergence of price
from production costs also. The
agribusiness sector has come
under fire recently for allegedly
manipulating input and output
prices to the detriment of farmers.
To date, however, convincing
evidence of excess market power
exists only in specific cases, such
as the one brought by the U.S.
government against the Archer
Daniels Midland Company for fixing
the price of lysine. Scant evidence
exists for concluding that farmers
have been the victims of price
fixing by large agribusiness firms,
although the potential grows as
concentration grows.
ENHANCING FARMERS’ MANAGEMENT
DECISIONS
A second argument for government
intervention is that farmers need
support because they face tremendous variability in output prices.
Market prices for raw agricultural
commodities are quite sensitive to
quantities produced, so that in years
of bumper crops, market prices can
be quite low, and in years of short
crops, market prices are significantly
higher. Government programs could
stabilize prices by subsidizing
commodity storage, or by placing a
floor below which prices cannot fall.
A more modern version of this
reasoning is that farm incomes are
highly variable from year to year
because of a reliance on unpredictable export demand, and therefore
government intervention is needed to
stabilize income.
While it may be true that farmers
face variability in yields, prices, and
income, variability does not, by itself,
constitute a market failure. Variabil-
ity is simply a characteristic of
agricultural markets. Farmers can
take action to manage income variability, including diversifying crops (oats,
alfalfa, vegetables, trees), incorporating livestock enterprises, and purchasing insurance.
It must be remembered that many
U.S. farmers are able to manage
variability and thrive with no federal
subsidies. Producers of livestock,
fresh produce, tree crops, and nursery
crops do not receive government
support. The markets they compete in
are no less variable than markets for
cotton, the major food and feed
grains, or milk. The question of why
producers of these latter crops need
federal help in managing variability
while other producers do not needs to
be answered before variability can be
used to justify intervention.
INTEREST-GROUP PRESSURE
A third reason for government
intervention is simply that the
government is responding to pressure from producer interest groups.
There is nothing unique about
interest groups lobbying for passage
of legislation favorable to their
constituents. In fact, that is the way
that democracies function. One
policy option is to accept this reality
and design farm policy to transfer
enough money to agriculture to
satisfy political pressure, but do it in
a way that minimizes the long-run
damage to the agricultural sector.
WHY THE FAIR ACT?
Most observers believe that the FAIR
Act was passed because of a unique
combination of history and circumstances. In the mid-1990s, the
national political climate and robust
economic conditions turned the tide
away from traditional farm policies
that had government both supporting prices and limiting production.
·In 1995, the Republican Party
took control of the House of
Representatives and vowed to
greatly decrease government’s
role in the economy to fulfill its
“Contract with America.” Some
CENTER FOR AGRICULTURAL AND RURAL DEVELOPMENT
FALL 1999
Iowa Ag Review
in the Party targeted farm
programs from day one because
they were seen as a prime
example of government interference with free markets and the
management of farm operations.
·Then, in the fall and winter of
1995, crop prices increased to
levels such that traditional farm
program payments would
essentially disappear.
·Meanwhile, in Congress, Senator
Lugar, chair of the Agricultural,
Nutrition, and Forestry Committee, and others saw the need to
continue down the path of
incremental reform of farm
programs toward greater
market orientation and lower
government costs that had
been initiated with the previous
farm bills.
·Responding to the strength in
commodity prices, mainstream
producer groups rallied behind
Freedom to Farm with its fixed
program payments, and it
passed.
Given this history, it is not
surprising that many former advocates of FAIR are calling for a return
to the old farm policy now that crop
prices have fallen to levels where
payments would be higher under the
old supply-control programs.
But wouldn’t an abandonment of
Freedom to Farm reduce the flexibil-
ity and competitiveness of the
agricultural sector? After all, many
advocates of the current policy say
that by getting government out of
agriculture, Freedom to Farm has
forced farmers to look to the marketplace for signals about what and how
much to produce, rather than to
government. But this is far from an
accurate assessment.
Acreage was planted in 1999
solely because the government floor
prices were in place. Thus, the large
supply of crops in 1999 and the
resulting low market prices were
actually enhanced by the FAIR Act’s
floor prices. The supply expansion
was especially significant for soybeans because the government floor
price of soybeans was set high
relative to the floor prices of corn
and wheat in the FAIR Act.
In addition, the 1999 increase in
crop insurance subsidies also increased production. There is an old
adage that you always get more of
what you subsidize. Thus, crop
insurance subsidies tend to increase
risky behavior. The subsidies increase
the viability of continuous wheat
production in the arid Great Plains on
land more suitable for wheat grown in
a wheat-fallow rotation. The subsidies
also increase the production of corn
and soybeans on land that is more
suited for crops that can better
withstand drought and high heat.
25
Billion Dollars
20
15
10
5
0
1981
*estimated
1983
1985
1987
1989
1991
1993
1995
1997
1999*
A FLEXIBLE AND COMPETITIVE
AGRICULTURAL SECTOR
There are few people, if any, who
believe that the current farm policy
should be maintained; and at times
the clamor for a new farm policy has
been deafening. The loudest voices
are saying that the U.S. government
should dramatically increase its
involvement in agriculture. Given that
the role of government in agriculture
in 1999 is already pervasive, these
fervent appeals bring us back to our
original question: What exactly do we
want farm policy to do?
If we want policy to move
midwestern agriculture to a marketoriented system, with farmers
producing the commodities consumers want, in the quantities that can
be profitably produced, then we
should eliminate all governmentguaranteed prices (the loan rates)
and crop insurance subsidies. Under
this policy alternative, land in lowyielding fringe production areas
would come out of production in
2000, the supply of crops would
drop, and the prices of corn, soybeans, and wheat would increase.
The low-cost producers would be
able to weather this disruption in
supply and may even come out of it
in better shape than if the current
policy is maintained. This policy
objective, however, appears to be a
“non-starter,” because the vast
majority of opinion leaders and farm
organizations are opposed to letting
the market determine who should be
producing crops in the Midwest.
If we want farm policy to supplement farmers’ incomes in a way that
maintains the long-run benefits of
production flexibility and a marketdriven agricultural sector, then we
should eliminate the loan rates and
crop insurance subsidies, and simply
write government checks to farmers.
The size of the checks should have
no relationship to the actual production decisions that farmers implement. If Congress needs to transfer
Continued on page 6
FALL 1999
CENTER FOR AGRICULTURAL AND RURAL DEVELOPMENT
3
Iowa Ag Review
Iowa’s Agricultural Situation
Phil Kaus
pkaus@iastate.edu
515-294-6175
3.00
T
he combines are starting to roll in the cornbelt. The
October 1, Crop Report showed that 18 percent of
Iowa’s corn crop and 32 percent of the soybean crop
were in the bin. Current estimates for the U.S. corn crop
are between 9.1 and 9.4 billion bushels and between 2.7 to
2.8 billion bushels for the soybean crop. These rather
large crops will add to an already ample carryover supply.
Large red meat production this summer and the large
production expected heading into the fourth quarter will
force pork prices lower in the fourth quarter. In response
to the continuing low farm income levels, the government
is considering a second assistance package.
2.60
2.40
2.20
2.00
1.80
1.60
JAN
FEB MAR APR MAY JUN
1998
JUL AUG SEP OCT NOV DEC
1999
Avg 94-98
7.50
Continued on page 10
6.50
6.00
5.50
5.00
4.50
4.00
JAN
FEB MAR APR MAY JUN
1998
1999
JUL
AUG SEP OCT NOV DEC
Avg 94-98
1.95
Dollars per Bushel
1.80
1.65
1.50
1.35
1.20
1.05
.90
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
1998
1999
Avg 94-98
115
Dollars per Ton
During the last week of September, elevators in central Iowa
were paying between $1.55 and $1.65 per bushel, and the
December contract for corn had declined to the $2.10 per
bushel range. This has resulted in a basis of between $ –0.50
and $ –0.60 for the past several weeks. As more of the corn
makes its way into the bin, producers will be concerned with
basis levels and current loan deficiency payment (LDP) rates.
The Center for Agricultural and Rural Development (CARD)
monitors LDP rates on a daily basis, and this information is
available on the CARD Web site (http://www.card.iastate.
edu) (see article on page 6). The user can evaluate three
grain marketing strategies that take into account expected
basis levels, LDP rates, and storage.
Given the current world stocks-to-use ratio (see table
on page 5) and an estimated 1.8 billion bushels in U.S. old
crop carryover (25 percent of which is stored in Iowa), it is
going to be hard for prices to sustain a large rally. International issues concerning genetically modified organism
(GMO) crops has led some grain handlers to refuse GMO
corn, as some varieties have not been accepted for export
to the European Union (EU) or Japan. Identity preservation
of crops will be important for producers, with some grain
handling facilities offering premiums for non-GMO crops.
The American Seed Trade Association (ASTA) (http://
www.amseed.org) has established a web site containing a
database of all facilities accepting GMO corn. The users
enter their area code and the distance they are willing to
transport their crop, and the database generates a list of all
facilities within the specified distance that accept GMO corn.
Soybeans during the last week of September at central
Iowa elevators were trading between $4.35 and $4.45 per
bushel. The market is expecting a record production year
due to the largest ever soybean plantings this spring; and
this is on top of a 348 million bushel carryover (26 percent
in Iowa). Producers will want to watch LDP rates carefully
because the LDP will amount to about 20 percent of the
gross revenue for soybeans this year.
Dollars per Bushel
7.00
CROPS
4
Dollars per Bushel
2.80
105
95
85
75
65
JAN FEB MAR APR MAY JUN
1998
CENTER FOR AGRICULTURAL AND RURAL DEVELOPMENT
1999
JUL AUG SEP OCT NOV DEC
Avg 94-98
FALL 1999
Iowa Ag Review
Iowa Cash Receipts Jan. – June 1999
70
Dollars per Cwt
68
66
Crops
Livestock
Total
64
62
60
1998
(Million Dollars)
1997
2,435
2,386
4,821
3,017
2,559
5,576
3,594
2,707
6,301
World Stocks-to-Use Ratios
58
JAN
FEB MAR APR MAY JUN
1998
JUL
1999
AUG SEP OCT NOV DEC
Avg 94-98
Corn
Soybeans
Wheat
100
95
Dollars per Cwt
1999
Crop Year
(Sept. Projection)
(Estimate)
1999/00
1998/99
1997/98
(Percent)
17.61
17.91
14.89
15.35
15.69
14.42
21.14
22.97
23.81
90
85
Average Farm Prices
Received by Iowa Farmers
80
75
70
September*
1999
65
60
JAN FEB MAR APR MAY JUN
1998
JUL AUG SEP OCT NOV DEC
1999
Avg 94-98
55
Dollars per Cwt
40
35
30
25
20
15
JAN
FEB MAR APR MAY JUN
1998
JUL
1999
($/Bushel)
1.65
4.22
1.10
1.72
5.20
1.20
Alfalfa
All Hay
67.00
66.00
($/Ton)
74.00
74.00
80.00
79.00
Steers & Heifers
Feeder Calves
Cows
Barrows & Gilts
Sows
Sheep†
Lambs†
65.30
91.10
38.00
33.60
22.50
29.70
72.60
($/Cwt.)
64.50
87.40
38.30
38.60
24.30
30.30
80.00
58.70
71.30
33.10
31.90
22.20
27.40
70.10
Turkeys
0.36
($/Lb.)
0.36
0.38
Eggs
0.29
($/Dozen)
0.33
0.46
14.80
($/Cwt.)
12.90
16.10
AUG SEP OCT NOV DEC
Avg 94-98
40
All Milk
35
Dollars per Cwt
September
1998
1.65
4.55
1.10
Corn
Soybeans
Oats
50
45
August
1999
30
*Mid-month
†
Estimate
25
20
15
10
JAN
FEB MAR APR MAY JUN
1998
FALL 1999
1999
JUL
AUG SEP OCT NOV DEC
Avg 94-98
CENTER FOR AGRICULTURAL AND RURAL DEVELOPMENT
5
Iowa Ag Review
Whither Farm Policy?, cont. from page 3
more money to agriculture when
widespread crop or revenue loss
occurs, the size of the checks could
depend inversely on the level of
market prices or revenue levels in a
region (state or county).
At the county level, such programs already exist. For example, the
Group Risk Plan (GRP) and Group
Risk Income Protection (GRIP) pay
farmers indemnities if county average
yield or county average revenue is
below a certain level. Because the
payments depend on county yield, a
single farmer’s actions cannot affect
the level of payment. The government could give every farmer a GRP
or GRIP policy. If farmers want to add
individualized risk management
protection, then they could pay the
full cost of a business-interruption
insurance plan, much like other
businesses do.
The key factor in a flexible and
competitive agricultural sector is
that farm-level production decisions
need to be reflected in farm income.
Only then will we see midwestern
farmers producing the crops that
consumers want, at prices that cover
the cost of production.
Clearly, the debate about what to
do about farm policy is very much
alive. But what we need to focus on is
the ultimate objective of farm policy
and the costs of implementing policies
to meet this objective. We should
build on what we have learned from
our experience with the old supplycontrol programs, the various environmental provisions, and with Freedom
to Farm to design a policy that does
not hinder agriculture’s ability to
respond to current and future economic realities. t
SELL OR STORE?
CARD’s Web-based decision aid is now available
The Center for Agricultural and Rural Development (CARD) recently
launched an interactive Web site (www.card.iastate.edu) to help farmers
understand the risks and rewards associated with alternative marketing strategies for corn and soybeans.
Producers in the contiguous 48 states can access the site, input their county
name and crop information, and receive county and crop loan rates, posted
county prices, and per-bushel loan deficiency payment (LDP) figures. In addition, the site provides information that can help producers decide whether it is
better to store or sell their crops at harvest.
The Web site uses sophisticated numerical procedures to calculate
average returns and the riskiness of returns for three different strategies that
involve crop storage. The strategies are (1) take the LDP now and store until
summer, (2) put the crop under loan and store until summer, and (3) take the
LDP now, store until summer, and hedge on the futures market.
“Last year many farmers did not fully understand how to incorporate
the LDP and the government’s loan program into their fall marketing
strategies,” Bruce Babcock, director of CARD, says. “Many producers
ended up taking the LDP in the fall and storing their crop, instead of
selling it at harvest. These producers then watched the value of their
stored crop decline as prices plummeted in the late spring and early
summer. Our new Web-based decision aid is designed to inform
producers of the potential risks and rewards associated with
common marketing strategies that involve storage. They can then
be in a better position to decide if the potential rewards from
storing the crop are high enough to compensate them for the
increased risk.”
6
CENTER FOR AGRICULTURAL AND RURAL DEVELOPMENT
FALL 1999
Iowa Ag Review
Can Subsidies Hurt Iowa Agriculture?
Bruce A. Babcock
babcock@iastate.edu
515-294-6785
Chad Hart
chart@card.iastate.edu
515-294-9911
rate increases supply and reduces
market price. However, this drop in
the market price does no harm to
farmers because per-bushel LDP
payments increase to fully compensate for the price decrease.
M
CROP INSURANCE SUBSIDIES
any congressional leaders
want to begin hearings this
winter that could lead to a
new farm bill. Nearly all interest
groups want to see an increase in
federal involvement in agriculture.
But before Iowa’s farm groups push
for a change in policy, they should
understand that, for Iowa, some
forms of government help are preferred to others, and some forms of
government assistance can actually
be harmful.
What could be wrong with
subsidies? After all, increased
government aid puts more money in
the pockets of farmers. But most
agricultural subsidies increase
supply, which, in turn, decreases
prices. The negative impact of lower
prices might be greater than the
positive impact of increased aid. We
have outlined several agricultural
subsidies below and examined their
impacts.
AMTA PAYMENTS
Agricultural market transition assistance (AMTA) payments are program
payments that are completely independent of a farmer’s production
decisions and production levels.
Hence, they do not induce an increase in supply. They simply
increase cash flow to a qualifying
farm operation.
LDPS
With the loan deficiency payment
(LDP) program, all U.S. corn and
soybean farmers are guaranteed a
minimum price for all their production. In years when farmers expect
market prices to fall below the loan
rate, the resulting supply is greater
than it would be without the program. That is, in some years the loan
FALL 1999
Crop insurance subsidies promote
risky behavior by inducing more
. . . current policy is inconsistent in that governmentmandated price guarantees
and crop insurance subsidies are increasing supply
at a time when the market
is signaling that we have
plentiful supplies.
acreage into production in areas where
crop yields are highly variable. Thus,
the increase in crop insurance subsidies in 1999 and the likely increase in
2000 will induce an increase in supply
and a lower market price for corn and
soybeans. How likely is it that the
negative effects of a lower price will be
greater than the direct benefit that
Iowa farmers receive from crop
insurance subsidies?
First of all, we can say that in 1999
Iowa farmers were fully insulated from
a drop in market price because, as
discussed above, when the market
price is below the loan rate, a further
drop simply increases LDP payments.
Iowa farmers, therefore, should not be
concerned about the supply-enhancing effects of crop insurance subsidies
as long as the market price is below
the loan rate. But, with any luck,
market prices for corn and soybeans
will soon rise above the loan rate.
When this occurs, will Iowa farmers
receive a net benefit from crop
insurance subsidies?
Iowa corn farmers received
approximately $53 million in crop
insurance premium subsidies in
1999. Soybean producers received
$27 million. Using expected 1999
production levels for Iowa, this
works out to 2.9 cents per bushel for
corn and 4.9 cents per bushel for
soybeans. Using conservative
estimates of the impact of insurance
subsidies on supply, we calculate
that eliminating crop insurance
subsidies would increase corn prices
by at least 8 cents per bushel and
soybean prices by at least 30 cents
per bushel. This indicates that Iowa
farmers are net losers from crop
insurance subsidies when prices are
above the loan rate.
SUPPLY CONTROLS
One of the bedrock principles of the
current farm policy is the elimination
of all government controls on supply.
Proponents of the current policy
thought that the free market was
better at guiding production decisions than the government. But
current policy is inconsistent in that
government-mandated price guarantees and crop insurance subsidies
are increasing supply at a time when
the market is signaling that we have
plentiful supplies.
One way out of this inconsistency is for the federal government
to put a brake on supply by returning to acreage set-asides. This would
counteract the government supply
accelerator. Some farm groups have
been convinced of the need for
supply controls. But a full understanding of who really benefits from
supply controls may cause Iowa farm
groups to question the wisdom of a
return to acreage set-asides.
A reduction in supply will induce
an increase in price. If the price
remains below the loan rate, then
farmers will not benefit from the price
increase because LDP payments
would correspondingly decrease. If
the price rises above the loan rate
because of acreage set-asides, then the
CENTER FOR AGRICULTURAL AND RURAL DEVELOPMENT
7
Iowa Ag Review
benefits of the price increase are
proportionate to yields. A farmer with
150-bushel yields will benefit by 50
percent more than will a farmer with
100-bushel yields. So, a Kansas corn
farmer who produces 150 bushels per
acre with irrigation receives the same
benefit from the price increase as the
Iowa dryland farmer who produces
150 bushels per acre.
The cost of acreage set-asides,
however, depends on both yields
and per-acre production costs.
Cash rents for farmland are a good
measure of the relative costs of set-
asides. If cash rents in Iowa are
$110 per acre compared to $65 per
acre in Kansas, then the cost of
acreage set-asides are nearly twice
as high in Iowa as Kansas. In this
example, the benefits from acreage
set-asides are equal in Iowa and
Kansas, but the costs are disproportionately high in Iowa.
What we have learned from this
brief excursion into the impacts of
subsidies is that a careful examination is needed before we can conclude that subsidies are beneficial.
Clearly, fixed payments are beneficial
to farmers, as are price guarantees.
But, whereas the budget costs of
fixed payments are known in advance, the cost of price guarantees
can grow to unexpected levels. If the
unexpected expense leads to supply
controls, then it is questionable
whether there is a positive net benefit
to Iowa farmers. And, perhaps
surprisingly, the net benefits from
crop insurance subsidies are likely to
be negative for Iowa’s low-cost
producers. That is, Iowa producers
would be better off if crop insurance
subsidies were eliminated.t
European Union Agricultural Reforms: Impacts for Iowa
to farmers through direct payments
while reducing support prices for
cereals, beef, and dairy products.
The Berlin Accord reforms are
likely to stimulate increased production in the EU and thereby create
substantial changes in European
agricultural markets. The overall
impact on markets for Iowa crops
and livestock, however, is projected
to be relatively small. Farm prices
for corn, soybeans, and oats are
modestly changed and, on average,
decline by 1 percent between 2001
and 2008. The expanded cereals
production in the EU will lead to
slightly lower world wheat prices
and lower U.S. exports. Iowa beef
and hog prices increase slightly in
the first two years of the reform
implementations; then, for the
remaining period, Iowa livestock
he European Union’s (EU)
prices decline relative to the
Common Agricultural Policy
baseline.
(CAP) is set to undergo comFAPRI (Food and Agricultural
prehensive reforms, known as Agenda
2000, next year. The twofold objective Policy Research Institute) at the
Center for Rural and Agricultural
of these reforms is to ensure the
sustainability of European agriculture Development (CARD) conducted an
analysis that estimates the impacts
and to protect the livelihood of
of the Berlin Accord for EU agriculEuropean farmers. In May 1999, the
tural markets. The analysis results
European Council officially adopted
were contrasted with a baseline
new financial and political guidescenario that maintains pre-Accord
lines—dubbed the Berlin Accord—
that will increase government support policies. The FAPRI modeling system
Samarendu Mohanty
smohant@card.card.iastate.edu
515-294-6296
Phil Kaus
pkaus@card.card.iastate.edu
515-294-6175
Authors’ note: The results reported in this
analysis are dependent on a series of
assumptions relating to the functioning of
EU markets and to the future world
agricultural and macroeconomic situations. Changes in the underlying assumptions could significantly alter the results
reported in this article. For further
discussion of the Berlin Accord reforms,
see CARD Briefing Paper 99-BP 24,
“Analysis of the Berlin Accord Reforms to
the European Union’s Common Agricultural Policy,” available online at http://
www.card.iastate.edu.
T
8
incorporates forecasts of macroeconomic variables—such as gross
domestic product, inflation rates,
and exchange rates—that were
obtained from Standard and Poors
DRI, Project Link, and WEFA. Weather
was assumed to be average during
the projection period.
EFFECTS ON EU AGRICULTURE
For crops, the CAP support prices
for cereals is reduced by 15 percent
in two steps, with the first reduction
occurring during the 2000/01 marketing year. Cereals producers in the
EU will be compensated for this
reduction by an increase in direct
payments from 54.34 to 63 euros per
metric ton (1 euro = $.93). Payments
to oilseed producers will be progressively reduced to the level for
cereals by the 2002/03 marketing
year. Producers of legumes and
pulses (protein substitutes) will
receive a direct payment of 9.5 euros
per metric ton on top of the basic
direct payment.
For beef, the support price is
reduced by 20 percent over a threeyear period. Then, in July 2002, the
intervention price will be replaced
by a beef basic price of 2224 euros
per metric ton, and a private storage
aid scheme will be introduced. All
CENTER FOR AGRICULTURAL AND RURAL DEVELOPMENT
FALL 1999
Iowa Ag Review
2.5
2.0
1.5
Percent Change
beef producers will be compensated for the
decline in market prices by a phased
increase in the special premium for steers,
bulls, and suckler cows (beef cows). A
slaughter premium is introduced (80 euros
per head for adult animals and 50 euros per
head for calves). All producer premiums
are capped at the regional level to contain
expenditures; however, national governments may supplement producer payments
up to the national financial expenditure
limit established for each country. Finally,
there will be a premium to encourage fewer
animals per land unit in an effort to improve environmental conditions.
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
1999
2000
2001
IMPACTS ON U.S. MARKETS
2003
2005
2006
2007
2006/07
2007/08
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
-3.5
1999/00
2000/01
2001/02
2002/03
Corn
IMPACTS ON IOWA
2003/04
2004/05
2005/06
Soybeans
Oats
2
1
Percent Change
Iowa beef and hog prices increase slightly
in 2001/02. For the remaining period, up to
2008, Iowa livestock prices decline relative
to the baseline. On average, both fed
steer and barrow and gilt prices are
projected to decline by less than 1 percent
(see Figure 1). Iowa acres planted to corn,
soybeans, and oats (see Figure 2) are
modestly changed through the projection
period. On average, corn and soybean
prices are projected to decline by 1
percent.
Following the trends for prices, net farm
income is slightly above the baseline level in
2000, but is projected to be 2 to 3 percent
lower during the remaining period (see
Figure 3). On a cumulative basis, the
implementation of the Berlin Accord reforms in the EU is projected to reduce Iowa’s
net farm income by approximately $475
million during the 2000 to 2008 period.t
2004
Steer Price
0.5
Percent Change
Changes in world market prices are likely
to be small. The United States and the EU
compete most heavily in the world wheat
markets, and, because the EU would
produce and export more wheat under the
Berlin Accord, the U.S. wheat prices and
exports are expected to decline by an
average of 2 to 3 percent. U.S. corn and
soybean prices are projected to fall by less
than 1 percent. The reduction in EU
oilseed production increases U.S. soybean
and meal exports slightly. Livestock prices
and beef exports increase slightly at first
and then decline by an average of 1
percent. Pork and poultry prices decline
by less than .5 percent.
FALL 1999
2002
Barrow & Gilt
0
-1
-2
-3
-4
1999
2000
2001
2002
2003
2004
2005
2006
2007
Iowa Net Farm Income
CENTER FOR AGRICULTURAL AND RURAL DEVELOPMENT
9
Iowa Ag Review
Iowa’s Ag Situation, cont. from page 4
LIVESTOCK
According to the U. S. Department of
Agriculture’s (USDA) latest Livestock
Slaughter, pork and beef production
set records for August. Both pork
and beef production were up 4
percent from last August’s records.
The September Hogs and Pigs report
indicates that producers have finally
started reducing sow numbers,
which should be a bullish sign for the
market in 2000.
The effects of Hurricane Floyd
no doubt will affect North Carolina
for years to come but don’t expect it
to greatly affect the hog markets.
Early estimates are for losses of
30,000 to 300,000 head. The shortand long-term market impacts will
ultimately depend on the class of
pigs or sows lost.
Pork prices on the Iowa-Southern
Minnesota market have shown
strength lately and have been in the
$35 to $38 per hundredweight range.
Hopefully with October being designated Pork Month, this will increase
demand at a time when production is
expected to be large. Pork slaughter
had already approached 2 million
head per week toward the end of
September, and it is expected to top
that level in October and November.
Strong retail demand will be essential
in avoiding last year’s debacle.
Beef demand has been solid all
summer, strong enough to counter
seasonal patterns and hold prices in
a profitable range for feeders. As a
result, placements into feedlots have
been at record or near record levels
since spring. According to the
USDA’s August Cattle on Feed, placements for the United States were 16
percent above 1998 levels and almost
12 percent above the five-year
average. Large heifer placements
indicate that the industry is still in
the reduction phase of the cattle
cycle, so feeder calf prices should
continue to strengthen in 2000. In
Iowa, August placements were up 44
percent. This suggests a large
number of slaughter-ready cattle will
be moving out of feedlots through
the first part of next year. As long as
the overall U.S. economy remains
strong, beef demand should continue strong.
On September 29, the House
passed a $8.7 billion farm income
assistance package. If the payments
are dispersed as an additional
marketing transition payment, this
would result in an approximate $500
million influx to Iowa’s farm
economy. Currently, the Food and
Agricultural Research Policy Institute (FARPI) is projecting Iowa net
farm income for 1999 at $1.9 billion.
This is based on trend yields in Iowa
for corn and soybeans of 139 and 39
bushels per acre, respectively. If
current yield estimates of 150 and 50
bushels per acre for corn and
soybeans hold, the government
assistance package could boost Iowa
net farm income to around $2.8
billion. Under this scenario, net farm
income would be just under the fiveyear average of $2.9 billion.t
Meet the Staff
P
hil Kaus joined CARD in July
1998 after completing a
master’s degree in statistics
and economics at the University of
Nebraska. He is the U.S. and Iowa
crops and livestock analyst for the
Food and Agricultural Policy Research Institute (FAPRI), part of
CARD’s Trade and Agricultural Policy
Division. Phil also does analysis of
international sugar, and quantity and
value of U.S. exports.
“One of the biggest challenges is
trying to be a jack-of-all-trades,” Phil
says. “We are providing a variety
information to several different
audiences.”
One of those audience groups
comprise Iowa Ag Review readers.
Phil writes and compiles information
for the “Iowa’s Ag Situation” column
that appears in each issue. He also
10
conducts analysis for the FAPRI
baseline and annual 10-year outlook
projection. Phil’s recent research
has been looking at Midwest statelevel exports of agricultural goods.
“We are trying to find a better
method of estimating state-level
exports,” he says.
Prior to graduate school, Phil
worked on a 2,000-acre farm and
ranch that raised Angus cattle,
wheat, and irrigated hay in the
northwest panhandle of Nebraska.
While he misses the wide-open
spaces of the farm, Phil says he likes
his work at CARD.
“I enjoy being able to provide
producers and policymakers with
valuable information to help in their
decision-making process,” he says.
Phil is married to Lyndi, and they
have four children, Reed, Alec,
Phil Kaus
Taylor, and Samantha. He enjoys
spending time with his family and
attending his children’s sporting
events. Phil also enjoys hunting and
fishing in his free time.t
CENTER FOR AGRICULTURAL AND RURAL DEVELOPMENT
FALL 1999
Iowa Ag Review
Recent CARD Publications
BRIEFING PAPERS
Bruce A. Babcock. “Whither Farm Policy?”
CARD Briefing Paper Series 99-BP 25,
September 1999.
Bruce A. Babcock, Mike Duffy, Robert Wisner.
“Availability and Market Penetration of
GMO Corn and Soybeans. CARD Briefing
Paper Series 99-BP 26, October 1999. [Online only*]
Bruce A. Babcock, John Beghin. “Potential
Market for Non-GMO Corn and Soybeans.
CARD Briefing Paper Series 99-BP 27,
October 1999. [On-Line only*]
WORKING PAPERS
Cheng Fang, John Beghin. “Food SelfSufficiency, Comparative Advantage, and
Agricultural Trade: A Policy Analysis Matrix
for Chinese Agriculture.” CARD Working
Paper Series 99-WP 223, August 1999.
Chad E. Hart, Bruce A. Babcock, Dermot J.
Hayes. “Livestock Revenue Insurance.”
CARD Working Paper Series 99-WP 224,
August 1999.
John C. Beghin, Sebastien Dessus. “Double
Dividend with Trade Distortions. Analytical
Results and Evidence from Chile.” CARD
Working Paper Series 99-WP 225, September
1999.
Helen H. Jensen, Laurian J. Unnevehr. “HACCP
in Pork Processing: Costs and Benefits.”
CARD Working Paper Series 99-WP 227,
September 1999.
Laurian Unnevehr, Helen H. Jensen. “The
Economic Implications of Using HACCP as a
Food Safety Regulatory Standard.” CARD
Working Paper Series 99-WP 228, September
1999.
JOURNAL ARTICLES
Bruce A. Babcock. “Conflict Between Theory
and Practice in Production Economics:
Discussion.” American Journal of Agricultural Economics (August 1999):719-21.
S. W. Chung, P. W. Gassman, L. A. Kramer, J. R.
Williams, R. Gu. “Validation of EPIC for Two
Watersheds in Southwest Iowa.” Journal of
Environmental Quality 28(3) (May/June
1999):971-79; CARD Journal Reprint RP
3.178.
CHAPTER FROM BOOK
John C. Beghin, B. Bowland, S. Dessus, D. van
der Mensbrugghe. “Trade, Environment,
and Public Health in Chile. Evidence from
an Economywide Model.” In Trade, Global
Policy and the Environment, World Bank
Discussion Paper 402, edited by P.
Fredriksson, The World Bank, Washington,
D.C., pp. 35-54, 1999.
J. D. Opsomer, F. J. Breidt. “Local Polynomial
Regression to Survey Sampling Estimation.”
In Proceedings of the 14th International
Workshop on Statistical Modelling, Graz,
Austria, July 19, 1999.
*http://card.iastate.edu/news/briefing.html
Visit
CARD’s
Web Site
News and information about CARD and related issues
www.
card.iastate.edu
Information about the research divisions of CARD
Directory and e-mail links to CARD faculty and staff
Overviews of FAPRI and MATRIC research and projects
Information about upcoming conferences and events
Publications information
FALL 1999
CENTER FOR AGRICULTURAL AND RURAL DEVELOPMENT
11
Iowa Ag Review
CARD
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